In response to the urgency of climate change and the financial rewards of energy efficiency, more than 60% of Fortune 100 companies have made public commitments to reduce greenhouse gas emissions or embrace renewable energy—or both, according to a World Wildlife Fund report. With a confluence of emerging business trends driving enterprises of all kinds to re-evaluate their energy strategies, these organizations are ahead of the pack.
But these companies are not immune to the financial obstacles that come with large-scale investments. Despite their size and scale—and despite their public commitments—even they can run up against the traditional barriers to investment: limited capital, limited terms, and long payback periods.
Enterprises of all kinds have started to leverage new and innovative financing structures that can fund energy projects with no upfront capital investment.
Virtual Power Purchase Agreements (VPPAs)
Investors and businesses alike have been increasingly relying on renewable energy sources as a hedge against uncertain market conditions. In coordination with renewable energy developments, long-term, fixed-price power purchase agreements (PPAs) have become a popular financing mechanism, as they guarantee energy developers a steady rate of return and guarantee energy buyers a predictable purchase price. But traditional PPAs can be tricky to implement. The energy that the solar/wind/etc. developer produces has to be physically transported to the purchaser. The role of the local utility, geographical restrictions, and market regulations can all combine to make traditional PPAs unfavorable for some businesses.
Virtual PPAs (VPPAs), on the other hand, allow companies to reap the same long-term fixed price for renewable energy without any physical energy exchange.
Instead, the buyer and the developer reach an agreed-upon price for a given time period (typically 5-20 years). The company continues to buy energy directly from the local utility, and the renewable energy developer sells the project’s energy directly into the local grid at floating market prices. As these energy prices fluctuate, the developer and the customer settle the difference. And the developer provides all environmental benefits to the customer.
The benefits of the VPPA are easy to recognize:
- No upfront capital costs and significant net present value (NPV). A 100MW project with a 20-year SPPA, for example, can generate $75 million in NPV.
- Companies entering VPPAs with renewable developers get a price hedge against market spikes.
- The environmental benefits of a VPPA help businesses achieve their long-term environmental and sustainability goals.
Property Assessed Clean Energy (PACE)
Technological advancements in SCADA systems, building management systems, energy intelligence software, and the Internet of Things are combining to revolutionize the impact and efficacy of energy management. Energy managers and plant/facility managers are now able to quickly identify cost-saving energy efficiency initiatives and business processes that can greatly reduce a company’s carbon footprint and increase its bottom line.
But getting funding for those initiatives isn’t always as easy. The payback period for HVAC system retrofitting, upgrades to pumps and turbines, or other large-scale investments can often take longer than two years to put into place, and corporate executives who think in terms of quarters, not years, can be tempted to shift investment priorities toward projects that can turn net positive much more quickly.
Property Assessed Clean Energy (PACE) has emerged as a financing structure that helps companies tackle these clean energy and efficiency initiatives without upfront costs. What started in California in 2005 is sweeping the country, with programs either active or under development in states across the country.
Under PACE financing, municipal governments provide the upfront capital for energy efficiency measures and renewable energy installations, and the companies reimburse the municipality over a given time period (typically 5-25 years) through adjustments to the company’s property tax.
PACE financing can be uniquely attractive, as it allows businesses to begin saving on energy as they pay off their investments—making PACE projects profitable from day one.
On-Bill financing (OBF) is another opportunity for businesses to reap the benefits of energy-efficiency projects without upfront capital investments. Under OBF energy initiatives, a company receives a loan for a project directly from its utility. The company pays back the loan through adjustments to its energy bill.
Like PACE-financed projects, OBF allows companies to embrace energy efficiency measures without additional budgetary resources. And, also like PACE-financed projects, OBF agreements can be structured so that the cost of the energy saved is greater than the repayment charge—generating immediate positive cash flow.
Records show that on-bill programs first began in the early 1990s, but the popularity of these financing structures has grown considerably in recent years. Utilities in 23 states are either offering on-bill programs or have programs in development.
These are just a few emerging options that businesses are embracing to help smooth the capital barriers to enhancing their energy strategy. Many organizations are also exploring options to turn their existing energy resources into value drivers. Through demand response programs, for example, large businesses can bring in revenue through reimbursements for reducing their energy usage when the grid is at peak demand—and use that money to cover the cost of the tools and services required to improve their operational energy efficiency.
Energy markets are constantly evolving, presenting new opportunities for businesses to make the most of their resources. Exploring these opportunities is an important step toward establishing a comprehensive energy strategy.